# PEABODY ENERGY CORP (BTU) FY 2022 MD&A Verbatim Item 7 Management's Discussion and Analysis from PEABODY ENERGY CORP's 10-K for fiscal year 2022. SEC filing source: https://www.sec.gov/Archives/edgar/data/1064728/000106472823000013/btu-20221231.htm Accession: 0001064728-23-000013 Filing date: 2023-02-24 Report date: 2022-12-31 Extracted structurally from real Item 7 body heading to real Item 7A/8 boundary. Published MD&A gate trimmed front/tail over-capture. Confidence: high Company profile: /company/BTU/ All MD&A years: /company/BTU/mda/ Previous year: /company/BTU/mda/fy2021/ (FY 2021) Next year: /company/BTU/mda/fy2023/ (FY 2023) Item 7.      Management’s Discussion and Analysis of Financial Condition and Results of Operations. The Company’s discussion and analysis of the year ended December 31, 2022 compared to the year ended December 31, 2021 is included herein. For discussion and analysis of the year ended December 31, 2021 compared to the year ended December 31, 2020, please refer to Item 7 of Part II, “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in Peabody’s Annual Report on Form 10-K for the year ended December 31, 2021, which was filed with the SEC on February 18, 2022 and is incorporated by reference herein. Non-GAAP Financial Measures The following discussion of Peabody’s results of operations includes references to and analysis of Adjusted EBITDA and Total Reporting Segment Costs, which are financial measures not recognized in accordance with U.S. generally accepted accounting principles (U.S. GAAP). Adjusted EBITDA is used by management as the primary metric to measure each of its segments’ operating performance and allocate resources. Total Reporting Segment Costs is also used by management as a component of a metric to measure each of its segments’ operating performance. [[GREPCENT_TABLE]] [["Peabody Energy Corporation","2022 Form 10-K","60"]] [[/GREPCENT_TABLE]] Table of Contents Also included in the following discussion of Peabody’s results of operations are references to Revenue per Ton, Costs per Ton and Adjusted EBITDA Margin per Ton for each reporting segment. These metrics are used by management to measure each of its reporting segments’ operating performance. Management believes Costs per Ton and Adjusted EBITDA Margin per Ton best reflect controllable costs and operating results at the reporting segment level. The Company considers all measures reported on a per ton basis to be operating/statistical measures; however, the Company includes reconciliations of the related non-GAAP financial measures (Adjusted EBITDA and Total Reporting Segment Costs) in the “Reconciliation of Non-GAAP Financial Measures” section contained within this Item 7. In its discussion of liquidity and capital resources, Peabody includes references to Free Cash Flow which is also a non-GAAP measure. Free Cash Flow is used by management as a measure of its financial performance and its ability to generate excess cash flow from its business operations. Peabody believes non-GAAP performance measures are used by investors to measure its operating performance. These measures are not intended to serve as alternatives to U.S. GAAP measures of performance and may not be comparable to similarly-titled measures presented by other companies. Refer to the “Reconciliation of Non-GAAP Financial Measures” section contained within this Item 7 for definitions and reconciliations to the most comparable measures under U.S. GAAP. Overview In 2022, Peabody produced and sold 122.9 million and 123.7 million tons of coal, respectively, from continuing operations. As of December 31, 2022, the Company reports its results of operations primarily through the following reportable segments: Seaborne Thermal Mining, Seaborne Metallurgical Mining, Powder River Basin Mining, Other U.S. Thermal Mining and Corporate and Other. The business of the Company’s seaborne operating platform is primarily export focused with customers spread across several countries, with a portion of its thermal and metallurgical coal sold within Australia. Generally, revenue from individual countries vary year by year based on electricity and steel demand, the strength of the global economy, governmental policies and several other factors, including those specific to each country. The Company classifies its seaborne mines within the Seaborne Thermal Mining or Seaborne Metallurgical Mining segments based on the primary customer base and coal reserve type of each mining operation. A small portion of the coal mined by the Seaborne Thermal Mining segment is of a metallurgical grade. Similarly, a small portion of the coal mined by the Seaborne Metallurgical Mining segment is of a thermal grade. Additionally, the Company may market some of its metallurgical coal products as a thermal coal product from time to time depending on market conditions. The Company’s Seaborne Thermal Mining operations consist of mines in New South Wales, Australia. The mines in that segment utilize both surface and underground extraction processes to mine low-sulfur, high Btu thermal coal. The Company’s Seaborne Metallurgical Mining operations consist of mines in Queensland, Australia, one in New South Wales, Australia and one in Alabama, USA. The mines in that segment utilize both surface and underground extraction processes to mine various qualities of metallurgical coal. The metallurgical coal qualities include hard coking coal, semi-hard coking coal, semi-soft coking coal and pulverized coal injection coal. The principal business of the Company’s thermal operating segments in the U.S. is the mining, preparation and sale of thermal coal, sold primarily to electric utilities in the U.S. under long-term contracts, with a relatively small portion sold as international exports as conditions warrant. The Company’s Powder River Basin Mining operations consist of its mines in Wyoming. The mines in that segment are characterized by surface mining extraction processes, coal with a lower sulfur content and Btu and higher customer transportation costs (due to longer shipping distances). The Company’s Other U.S. Thermal Mining operations reflect the aggregation of its Illinois, Indiana, New Mexico and Colorado mining operations. The mines in that segment are characterized by a mix of surface and underground mining extraction processes, coal with a higher sulfur content and Btu and lower customer transportation costs (due to shorter shipping distances). Geologically, the Company’s Powder River Basin Mining operations mine sub-bituminous coal deposits and its Other U.S. Thermal Mining operations mine both bituminous and sub-bituminous coal deposits. The Company’s Corporate and Other segment includes selling and administrative expenses, results from equity affiliates, corporate hedging activities, trading and brokerage activities, minimum charges on certain transportation-related contracts, the closure of inactive mining sites and certain commercial matters. [[GREPCENT_TABLE]] [["Peabody Energy Corporation","2022 Form 10-K","61"]] [[/GREPCENT_TABLE]] Table of Contents Resource Management. As of December 31, 2022, Peabody controlled approximately 2.4 billion tons of proven and probable coal reserves, 2.4 billion tons of resources and approximately 360,000 acres of surface property through ownership and lease agreements. The Company has an ongoing asset optimization program whereby its property management group regularly reviews these reserves, resources and surface properties for opportunities to generate earnings and cash flow through the sale or exchange of non-strategic coal reserves, resources and surface lands. These surface lands include acres where Peabody has completed post-mining reclamation. In addition, the Company generates revenue through royalties from coal reserves and oil and gas rights leased to third parties, farm income from surface lands under third-party contracts and lease income from surface lands under contracts with renewable energy ventures. Middlemount Mine. Peabody owns a 50% equity interest in Middlemount, which owns the Middlemount Mine in Queensland, Australia. The mine predominantly produces semi-hard coking coal and low-volatile pulverized coal injection (LV PCI) coal for sale into seaborne coal markets through Abbot Point Coal Terminal, with some capacity also secured at Dalrymple Bay Coal Terminal. Mining operations first commenced at the Middlemount Mine in late 2011. During the years ended December 31, 2022 and 2021, the mine sold 1.6 million and 2.0 million tons of coal, respectively (on a 50% basis). Summary Spot pricing for premium low-vol hard coking coal (Premium HCC), premium low-vol pulverized coal injection (Premium PCI) coal, Newcastle index thermal coal and API 5 index thermal coal, and prompt month pricing for PRB 8,880 Btu/Lb coal and Illinois Basin 11,500 Btu/Lb coal during the year ended December 31, 2022 is set forth in the table below. The seaborne pricing included in the table below is not necessarily indicative of the pricing the Company realized during the year ended December 31, 2022 due to quality differentials and a portion of its seaborne sales being executed through annual and multi-year international coal supply agreements that contain provisions requiring both parties to renegotiate pricing periodically, with spot, index and quarterly sales arrangements also utilized. The Company’s typical practice is to negotiate pricing for seaborne metallurgical coal contracts on a quarterly, spot or index basis and seaborne thermal coal contracts on an annual, spot or index basis. In the U.S., the pricing included in the table below is also not necessarily indicative of the pricing the Company realized during the year ended December 31, 2022 since the Company generally sells coal under long-term contracts where pricing is determined based on various factors. Such long-term contracts in the U.S. may vary significantly in many respects, including price adjustment features, price reopener terms, coal quality requirements, quantity parameters, permitted sources of supply, treatment of environmental constraints, extension options, force majeure and termination and assignment provisions. Competition from alternative fuels such as natural gas and other fuel sources may also impact the Company’s realized pricing. [[GREPCENT_TABLE]] [["","","High","","Low","","Average","","December 31, 2022","","February 17, 2023"],["Premium HCC (1)","","$","670.50","","","$","188.00","","","$","363.45","","","$","294.50","","","$","390.00"],["Premium PCI coal (1)","","$","655.00","","","$","180.50","","","$","330.81","","","$","284.50","","","$","344.00"],["Newcastle index thermal coal (1)","","$","452.81","","","$","201.54","","","$","362.78","","","$","398.50","","","$","187.27"],["API 5 index thermal coal (1)","","$","284.20","","","$","109.66","","","$","176.44","","","$","133.38","","","$","117.72"],["PRB 8,800 Btu/Lb coal (2)","","$","27.50","","","$","15.50","","","$","18.03","","","$","15.50","","","$","14.80"],["Illinois Basin 11,500 Btu/Lb coal (2)","","$","196.00","","","$","88.00","","","$","149.32","","","$","134.00","","","$","83.00"]] [[/GREPCENT_TABLE]] (1)    Prices expressed per metric tonne. (2)    Prices expressed per short ton. Within the global coal industry, supply and demand for its products and the supplies used for mining have been impacted by the ongoing Russian-Ukrainian conflict and the COVID-19 pandemic. Furthermore, inflationary pressures and supply chain constraints have contributed to rising costs and may continue to impact future periods. As future developments related to the Russian-Ukrainian conflict, the COVID-19 pandemic and rising inflation are unknown, the global coal industry data for the year ended December 31, 2022 presented herein may not be indicative of their ultimate impacts. [[GREPCENT_TABLE]] [["Peabody Energy Corporation","2022 Form 10-K","62"]] [[/GREPCENT_TABLE]] Table of Contents Within the seaborne metallurgical coal market, the year ended December 31, 2022 was characterized by significant volatility as a weakened global macroeconomic environment was counteracted by tight coal supply and continued trade flow disruptions following sanctions imposed on Russian coal imports. Steel prices trended lower during the year ended December 31, 2022, causing some steelmakers to implement small-scale output cuts. The reduction in steel output is partially influencing short-term incremental metallurgical coal demand in some markets; however, it is being more than offset by transitioning demand from many steelmakers removing exposure to Russian coal by seeking additional volumes from other regions such as Australia, the U.S. and Canada. This is particularly so for PCI, where Russia typically accounts for approximately 35% of global traded volumes. In early January 2023, China partially restarted imports of Australian coal for the first time in two years, providing additional market depth and further support for prices. The Company believes energy shortages and the global inflationary environment present a risk to industrial activity in some markets, but the underlying market fundamentals remain constructive with continuing themes of supply tightness, resilient and improving demand in some markets and further economic stimulus in China and elsewhere. Within the seaborne thermal coal market, global thermal coal prices ended the year at elevated levels, fueled by broader energy supply security concerns. These concerns have been driven by the Russian-Ukrainian conflict and the subsequent ban of Russian coal by European countries, as well as limited supply response out of Australia and Columbia due to weather and labor issues. In China, domestic coal production and renewable generation have been strong during the year ended December 31, 2022, which has lowered import demand. In India, strong growth in coal generation has supported increased import demand, despite elevated domestic coal production. Overall, global thermal coal markets remain turbulent as supply remains tight and European coal importers look to replace Russian coal. In the United States, overall electricity demand increased more than 3% year-over-year, positively impacted by weather and economic activity. Through the year ended December 31, 2022, electricity generation from thermal coal has declined year-over-year due to coal conservation by utilities, transportation issues impacting coal deliveries and stronger renewable generation. Coal’s share of electricity generation has declined to approximately 19% for the year ended December 31, 2022, while wind and solar’s combined generation share has increased to 15%. Coal inventories have continued to decline since December 2021, with a decline of approximately 6% or 5 million tons. During the year ended December 31, 2022, utility consumption of PRB coal declined approximately 5% compared to the prior year period. Financing Transactions During the first quarter of 2022, Peabody issued convertible senior unsecured notes and used the proceeds of the offering to retire nearer term higher cost senior secured debt. This both lowered the Company’s borrowing rates and extended debt maturities to 2028. Throughout 2022, Peabody continued to reduce its outstanding debt, and at December 31, 2022, all senior secured debt had been retired. High demand and tight supply for coal globally has resulted in a substantial rise in seaborne thermal coal prices during 2022, which has been amplified by the Russian-Ukrainian conflict, resulting in unprecedented upward volatility in Newcastle coal pricing since late February 2022. As a result, Peabody posted additional cash margin of $125.4 million during the year ended December 31, 2022 to satisfy the margin requirements for its derivative contracts. Refer to the “Liquidity and Capital Resources” section contained within this Item 7 for a further discussion of these financing and liquidity transactions. North Goonyella Redevelopment During the third quarter of 2022, the Company initiated the redevelopment of its North Goonyella Mine, a premium hard-coking coal longwall operation in Australia with over 70 million tons of coal reserves. The project will utilize substantial existing infrastructure and equipment at the mine, including a new 300-meter longwall system, a coal handling preparation plant, a dedicated rail loop for transport to the Dalrymple Bay Coal Terminal and an accommodation village with housing and service amenities for more than 400 workers. North Goonyella is anticipated to increase the Company’s production in its Seaborne Metallurgical Mining segment. The Company’s board of directors has approved redevelopment expenditures of $120 million for 2023, which include ventilation, equipment, conveyance and infrastructure updates in anticipation of reaching development coal, subject to regulatory approvals, in the first quarter of 2024. Cash flow from operations is expected to fund all redevelopment costs as the Company continues to strengthen its balance sheet. Future decisions about the redevelopment of North Goonyella may be impacted by Queensland’s increased royalty tiers. Development costs in addition to the current approved amount are estimated to be $240 million, with longwall operations expected to commence in 2026. [[GREPCENT_TABLE]] [["Peabody Energy Corporation","2022 Form 10-K","63"]] [[/GREPCENT_TABLE]] Table of Contents Other In March 2022, the Company entered into a joint venture with unrelated partners to form R3 Renewables LLC (R3). R3 was formed with the intent of developing various sites, including certain reclaimed mining land held by the Company in the U.S., for utility-scale photovoltaic solar generation and battery storage. During 2022, R3 has advanced efforts with potential customers, finalized its management team and commenced site evaluations with project developer Treaty Oak Clean Energy, LLC. The Company’s interest in R3 is accounted for as an equity method investment. The Company contributed $10.9 million to R3 and recorded an equity loss of $3.9 million from its operations during the year ended December 31, 2022. In March 2022, Peabody Investments Corp., a wholly owned subsidiary of the Company, entered into a commitment agreement relating to one of its qualified pension plans (the Plan) with an insurer. Under the commitment agreement, the Plan purchased a buy-in group annuity contract for approximately $500 million and the insurer will reimburse the Plan for benefit payments to be made to the Plan’s participants. Under the terms of this transaction, the Plan continues to administer and pay the retirement benefits of Plan participants and is reimbursed by the insurer for the payment of all benefits covered by the group annuity contract. In May 2022, the board of directors of Peabody Investments Corp. approved the termination of the Plan effective July 31, 2022. Refer to Note 14. “Pension and Savings Plans” to the accompanying consolidated financial statements for a further discussion of this transaction. Results of Operations Year Ended December 31, 2022 Compared to Year Ended December 31, 2021 The increase in income from continuing operations, net of income taxes for the year ended December 31, 2022 compared to the same period in 2021 ($970.0 million) was primarily driven by higher revenue ($1,663.6 million) due to higher realized prices and a 20% increase in metallurgical sales volumes; improved results from equity affiliates ($49.1 million); and lower interest expense ($43.1 million). These favorable variances were partially offset by higher operating costs and expenses ($737.7 million), which reflect increased sales price sensitive costs, the impacts of challenging weather conditions and inflationary pressures for commodities, materials, services, repairs and labor; and net losses on early debt extinguishments in the current year ($91.1 million). Adjusted EBITDA for the year ended December 31, 2022 reflected a 101% year-over-year increase of $928.0 million. Tons Sold The following table presents tons sold by operating segment: [[GREPCENT_TABLE]] [["","","","(Decrease) Increase"],["","Year Ended December 31,","","to Volumes"],["","2022","","2021","","Tons","","%"],["","(Tons in millions)"],["Seaborne Thermal Mining","15.6","","","17.3","","","(1.7)","","","(9.8)","%"],["Seaborne Metallurgical Mining","6.6","","","5.5","","","1.1","","","20.0","%"],["Powder River Basin Mining","82.6","","","88.4","","","(5.8)","","","(6.6)","%"],["Other U.S. Thermal Mining","18.4","","","16.9","","","1.5","","","8.9","%"],["Total tons sold from operating segments","123.2","","","128.1","","","(4.9)","","","(3.8)","%"],["Corporate and Other","0.5","","","2.0","","","(1.5)","","","(75.0)","%"],["Total tons sold","123.7","","","130.1","","","(6.4)","","","(4.9)","%"]] [[/GREPCENT_TABLE]] [[GREPCENT_TABLE]] [["Peabody Energy Corporation","2022 Form 10-K","64"]] [[/GREPCENT_TABLE]] Table of Contents Supplemental Financial Data The following table presents supplemental financial data by operating segment: [[GREPCENT_TABLE]] [["","Year Ended December 31,","","Increase (Decrease)"],["","2022","","2021","","$","","%"],["Revenue per Ton - Mining Operations (1)"],["Seaborne Thermal","$","86.07","","","$","54.09","","","$","31.98","","","59.1","%"],["Seaborne Metallurgical","243.78","","","131.83","","","111.95","","","84.9","%"],["Powder River Basin","12.89","","","10.99","","","1.90","","","17.3","%"],["Other U.S. Thermal","51.82","","","40.75","","","11.07","","","27.2","%"],["Costs per Ton - Mining Operations (1) (2)"],["Seaborne Thermal","$","44.65","","","$","33.64","","","$","11.01","","","32.7","%"],["Seaborne Metallurgical","125.92","","","99.55","","","26.37","","","26.5","%"],["Powder River Basin","12.06","","","9.46","","","2.60","","","27.5","%"],["Other U.S. Thermal","38.63","","","31.04","","","7.59","","","24.5","%"],["Adjusted EBITDA Margin per Ton - Mining Operations (1) (2)"],["Seaborne Thermal","$","41.42","","","$","20.45","","","$","20.97","","","102.5","%"],["Seaborne Metallurgical","117.86","","","32.28","","","85.58","","","265.1","%"],["Powder River Basin","0.83","","","1.53","","","(0.70)","","","(45.8)","%"],["Other U.S. Thermal","13.19","","","9.71","","","3.48","","","35.8","%"]] [[/GREPCENT_TABLE]] (1)This is an operating/statistical measure not recognized in accordance with U.S. GAAP. Refer to the “Reconciliation of Non-GAAP Financial Measures” section below for definitions and reconciliations to the most comparable measures under U.S. GAAP. (2)Includes revenue-based production taxes and royalties; excludes depreciation, depletion and amortization; asset retirement obligation expenses; selling and administrative expenses; restructuring charges; asset impairment; amortization of take-or-pay contract-based intangibles; and certain other costs related to post-mining activities. Revenue The following table presents revenue by reporting segment: [[GREPCENT_TABLE]] [["","","","Increase"],["","Year Ended December 31,","","to Revenue"],["","2022","","2021","","$","","%"],["","(Dollars in millions)"],["Seaborne Thermal Mining","$","1,345.6","","","$","934.0","","","$","411.6","","","44.1","%"],["Seaborne Metallurgical Mining","1,616.9","","","727.7","","","889.2","","","122.2","%"],["Powder River Basin Mining","1,065.5","","","971.2","","","94.3","","","9.7","%"],["Other U.S. Thermal Mining","952.2","","","689.1","","","263.1","","","38.2","%"],["Corporate and Other","1.7","","","(3.7)","","","5.4","","","145.9","%"],["Revenue","$","4,981.9","","","$","3,318.3","","","$","1,663.6","","","50.1","%"]] [[/GREPCENT_TABLE]] Seaborne Thermal Mining. The increase in segment revenue during the year ended December 31, 2022 compared to the prior year was due to favorable realized prices ($540.4 million), partially offset by unfavorable volumes ($128.8 million) which were impacted by wet weather in the current year and mine plan considerations which included a longwall move at the Wambo Underground Mine in the first half of 2022. Seaborne Metallurgical Mining. Segment revenue increased during the year ended December 31, 2022 compared to the prior year due to favorable realized prices at the Australian operations ($583.1 million), the resumption of sales at the Shoal Creek Mine ($236.6 million) and favorable volume and mix variances at the Australian operations ($69.5 million). Sales volumes increased by 20% from the prior year. Powder River Basin Mining. Segment revenue increased during the year ended December 31, 2022 compared to the prior year due to favorable realized prices ($168.5 million), offset by unfavorable volumes ($74.2 million) resulting from rail performance issues. [[GREPCENT_TABLE]] [["Peabody Energy Corporation","2022 Form 10-K","65"]] [[/GREPCENT_TABLE]] Table of Contents Other U.S. Thermal Mining. The increase in segment revenue during the year ended December 31, 2022 compared to the prior year was due to favorable realized prices ($209.2 million) and favorable volumes ($53.9 million). Corporate and Other. Segment revenue increased during the year ended December 31, 2022 compared to the prior year due to lower net unrealized mark-to-market losses on derivative contracts related to forecasted coal sales ($79.3 million), offset by lower results from trading activities ($74.5 million) due to net realized losses on derivative contracts related to forecasted coal sales exceeding the higher margins recognized on the physical sale of coal. Adjusted EBITDA The following table presents Adjusted EBITDA for each of the Company’s reporting segments: [[GREPCENT_TABLE]] [["","","","Increase (Decrease) to"],["","Year Ended December 31,","","Adjusted EBITDA"],["","2022","","2021","","$","","%"],["","(Dollars in millions)"],["Seaborne Thermal Mining","$","647.6","","","$","353.1","","","$","294.5","","","83.4","%"],["Seaborne Metallurgical Mining","781.7","","","178.2","","","603.5","","","338.7","%"],["Powder River Basin Mining","68.2","","","134.9","","","(66.7)","","","(49.4)","%"],["Other U.S. Thermal Mining","242.4","","","164.2","","","78.2","","","47.6","%"],["Corporate and Other","104.8","","","86.3","","","18.5","","","21.4","%"],["Adjusted EBITDA (1)","$","1,844.7","","","$","916.7","","","$","928.0","","","101.2","%"]] [[/GREPCENT_TABLE]] (1)This is a financial measure not recognized in accordance with U.S. GAAP. Refer to the “Reconciliation of Non-GAAP Financial Measures” section below for definitions and reconciliations to the most comparable measures under U.S. GAAP. Seaborne Thermal Mining. Segment Adjusted EBITDA increased during the year ended December 31, 2022 compared to the same period in the prior year as a result of higher realized prices net of sales sensitive costs ($495.5 million) and favorable foreign currency impacts ($25.2 million). The increases were offset by unfavorable operational costs ($119.8 million) resulting from the impacts of wet weather, COVID-19-related staffing shortages, the longwall move at the Wambo Underground Mine in the first half of 2022 and inflationary pressures on supplies and outside services; lower volumes ($64.7 million); higher port and demurrage costs ($21.7 million) and higher commodity pricing ($18.6 million). Seaborne Metallurgical Mining. Segment Adjusted EBITDA increased during the year ended December 31, 2022 compared to the same period in the prior year due to higher realized prices net of sales sensitive costs at the Australian operations ($466.9 million), favorable volumes from the resumption of sales at the Shoal Creek Mine ($111.6 million) and favorable foreign currency impacts ($36.3 million). Powder River Basin Mining. Segment Adjusted EBITDA decreased during the year ended December 31, 2022 compared to the same period in the prior year as a result of increased overburden removal costs as the workforce focused on preparatory efforts in light of rail performance issues ($63.3 million); higher costs for materials, services, repairs and labor ($55.3 million) due in part to increased repairs for an aging equipment fleet and inflationary pressures on materials and services; the unfavorable impacts of higher commodity pricing ($53.9 million); and lower volumes ($19.9 million) resulting from rail performance issues. These decreases were offset by higher realized prices net of sales sensitive costs ($146.7 million). Other U.S. Thermal Mining. Segment Adjusted EBITDA increased during the year ended December 31, 2022 compared to the same period in the prior year due to higher realized prices net of sales sensitive costs ($210.4 million) and favorable volumes ($19.2 million). These increases were offset by higher costs for materials, services, repairs and labor ($104.8 million) due in part to increased equipment repairs and headcount resulting from increasing volume demands and inflationary pressures on materials and services; and the unfavorable impacts of higher commodity pricing ($44.2 million). [[GREPCENT_TABLE]] [["Peabody Energy Corporation","2022 Form 10-K","66"]] [[/GREPCENT_TABLE]] Table of Contents Corporate and Other Adjusted EBITDA. The following table presents a summary of the components of Corporate and Other Adjusted EBITDA: [[GREPCENT_TABLE]] [["","","","Increase (Decrease)"],["","Year Ended December 31,","","to Income"],["","2022","","2021","","$","","%"],["","(Dollars in millions)"],["Middlemount (1)","$","132.8","","","$","48.2","","","$","84.6","","","175.5","%"],["Resource management activities (2)","29.3","","","6.9","","","22.4","","","324.6","%"],["Selling and administrative expenses","(88.8)","","","(84.9)","","","(3.9)","","","(4.6)","%"],["Other items, net (3)","31.5","","","116.1","","","(84.6)","","","(72.9)","%"],["Corporate and Other Adjusted EBITDA","$","104.8","","","$","86.3","","","$","18.5","","","21.4","%"]] [[/GREPCENT_TABLE]] (1)Middlemount’s results are before the impact of related changes in deferred tax asset valuation allowance and reserves and amortization of basis difference. Middlemount’s standalone results included (on a 50% attributable basis) aggregate amounts of depreciation, depletion and amortization, asset retirement obligation expenses, net interest expense and income taxes of $62.7 million and $42.0 million during the years ended December 31, 2022 and 2021, respectively. (2)Includes gains (losses) on certain surplus coal reserve, resource and surface land sales and property management costs and revenue. (3)Includes trading and brokerage activities, costs associated with post-mining activities, gains (losses) on certain asset disposals, minimum charges on certain transportation-related contracts, costs associated with suspended operations including the North Goonyella Mine and expenses related to other commercial activities. Corporate and Other Adjusted EBITDA benefited during the year ended December 31, 2022 compared to the same period in the prior year from favorable variances in Middlemount’s results due to the impact of higher sales pricing ($84.6 million) and gains on various land sales in both the U.S. and Australia ($20.0 million). This benefit was offset by unfavorable trading results ($61.6 million) and a gain recognized in the prior year on the sale of the Company’s Millennium Mine ($26.1 million) as discussed in Note 17. “Other Events.” Income From Continuing Operations, Net of Income Taxes The following table presents income from continuing operations, net of income taxes: [[GREPCENT_TABLE]] [["","","","Increase (Decrease) to Income"],["","Year Ended December 31,"],["","2022","","2021","","$","","%"],["","(Dollars in millions)"],["Adjusted EBITDA (1)","$","1,844.7","","","$","916.7","","","$","928.0","","","101.2","%"],["Depreciation, depletion and amortization","(317.6)","","","(308.7)","","","(8.9)","","","(2.9)","%"],["Asset retirement obligation expenses","(49.4)","","","(44.7)","","","(4.7)","","","(10.5)","%"],["Restructuring charges","(2.9)","","","(8.3)","","","5.4","","","65.1","%"],["Asset impairment","(11.2)","","","\u2014","","","(11.2)","","","n.m."],["Changes in deferred tax asset valuation allowance and reserves and amortization of basis difference related to equity affiliates","2.3","","","33.8","","","(31.5)","","","(93.2)","%"],["Interest expense","(140.3)","","","(183.4)","","","43.1","","","23.5","%"],["Net (loss) gain on early debt extinguishment","(57.9)","","","33.2","","","(91.1)","","","(274.4)","%"],["Interest income","18.4","","","6.5","","","11.9","","","183.1","%"],["Net mark-to-market adjustment on actuarially determined liabilities","27.8","","","43.4","","","(15.6)","","","(35.9)","%"],["Unrealized losses on derivative contracts related to forecasted sales","(35.8)","","","(115.1)","","","79.3","","","68.9","%"],["Unrealized losses on foreign currency option contracts","(2.3)","","","(7.5)","","","5.2","","","69.3","%"],["Take-or-pay contract-based intangible recognition","2.8","","","4.3","","","(1.5)","","","(34.9)","%"],["Income tax benefit (provision)","38.8","","","(22.8)","","","61.6","","","270.2","%"],["Income from continuing operations, net of income taxes","$","1,317.4","","","$","347.4","","","$","970.0","","","279.2","%"]] [[/GREPCENT_TABLE]] (1)This is a financial measure not recognized in accordance with U.S. GAAP. Refer to the “Reconciliation of Non-GAAP Financial Measures” section below for definitions and reconciliations to the most comparable measures under U.S. GAAP. [[GREPCENT_TABLE]] [["Peabody Energy Corporation","2022 Form 10-K","67"]] [[/GREPCENT_TABLE]] Table of Contents Depreciation, Depletion and Amortization. The following table presents a summary of depreciation, depletion and amortization expense by reporting segment: [[GREPCENT_TABLE]] [["","","","(Decrease) Increase"],["","Year Ended December 31,","","to Income"],["","2022","","2021","$","","%"],["","(Dollars in millions)"],["Seaborne Thermal Mining","$","(114.4)","","","$","(107.7)","","","$","(6.7)","","","(6.2)","%"],["Seaborne Metallurgical Mining","(88.8)","","","(73.3)","","","(15.5)","","","(21.1)","%"],["Powder River Basin Mining","(42.5)","","","(41.5)","","","(1.0)","","","(2.4)","%"],["Other U.S. Thermal Mining","(62.2)","","","(67.4)","","","5.2","","","7.7","%"],["Corporate and Other","(9.7)","","","(18.8)","","","9.1","","","48.4","%"],["Total","$","(317.6)","","","$","(308.7)","","","$","(8.9)","","","(2.9)","%"]] [[/GREPCENT_TABLE]] Additionally, the following table presents a summary of the Company’s weighted-average depletion rate per ton for active mines in each of its operating segments: [[GREPCENT_TABLE]] [["","Year Ended December 31,"],["","2022","","2021"],["Seaborne Thermal Mining","$","2.61","","","$","2.19"],["Seaborne Metallurgical Mining","2.55","","","1.18"],["Powder River Basin Mining","0.32","","","0.25"],["Other U.S. Thermal Mining","1.23","","","1.15"]] [[/GREPCENT_TABLE]] The increase in the weighted-average depletion rate per ton for the Seaborne Thermal Mining segment during the year ended December 31, 2022 compared to the same period in the prior year reflects the impact of volume and mix variances across the segment. The increase in the Seaborne Metallurgical Mining segment during the year ended December 31, 2022 compared to the same period in the prior year reflects the resumption of sales at the Shoal Creek Mine. Asset Impairment. The Company recognized $11.2 million in aggregate asset impairment charges during the year ended December 31, 2022 related to the sale of certain land interests and an investment in equity securities. Refer to Note 3. “Asset Impairment” to the accompanying consolidated financial statements for further information regarding the nature and composition of those charges, which information is incorporated herein by reference. Changes in Deferred Tax Asset Valuation Allowance and Reserves and Amortization of Basis Difference Related to Equity Affiliates. During the year ended December 31, 2021, the Company released a valuation allowance of approximately $33 million previously recorded on Middlemount’s deferred tax assets as a result of taxable income generated during 2021. As of December 31, 2021, no valuation allowance remained related to Middlemount’s deferred tax assets so there is no release reflected in 2022. The current year income activity relates only to the amortization of basis differences which is comparable to prior periods. Refer to Note 5. “Equity Method Investments” to the accompanying consolidated financial statements for further information regarding these changes, which information is incorporated herein by reference. Interest Expense. The decrease in interest expense during the year ended December 31, 2022 compared to the prior year primarily reflects debt retirements completed by the Company during 2022 and 2021 and prior year fees related to a series of refinancing transactions completed by the Company as further described in Note 10. “Long-term Debt” to the accompanying consolidated financial statements. Net (Loss) Gain on Early Debt Extinguishment. The net loss (gain) on early debt extinguishment was primarily related to the redemption of existing notes during the years ended December 31, 2022 and 2021, as further discussed in Note 10. “Long-term Debt” to the accompanying consolidated financial statements. Interest Income. The increase in interest income during the year ended December 31, 2022 compared to the prior year was primarily due to higher cash balances and interest rates in the current year. [[GREPCENT_TABLE]] [["Peabody Energy Corporation","2022 Form 10-K","68"]] [[/GREPCENT_TABLE]] Table of Contents Net Mark-to-Market Adjustment on Actuarially Determined Liabilities. The gain recorded during the year ended December 31, 2022 was driven by increases to the discount rates for actuarially determined liabilities ($190.1 million) and the favorable impacts of changes for the postretirement benefit plans related to updated claims experience ($28.6 million). These increases were offset by mark-to-market losses on pension and postretirement benefit plan assets ($162.1 million); the unfavorable impact of the premium paid for the purchase of a buy-in group annuity contract for a qualified pension plan ($17.6 million) and the unfavorable impacts of medical trend updates for the postretirement benefit plans ($15.7 million). The gain recorded during the year ended December 31, 2021 was driven by increases to the discount rates for actuarially determined liabilities ($37.6 million); the favorable impacts of changes for the postretirement benefit plans related to updated claims experience ($22.0 million) and a mortality update ($16.6 million); and the favorable impact of an update to the Company’s census data for actuarially determined liabilities ($10.3 million). These increases were offset by mark-to-market losses on pension and postretirement benefit plan assets ($43.1 million). Unrealized Losses on Derivative Contracts Related to Forecasted Sales. Unrealized losses primarily relate to mark-to-market activity on derivative contracts related to forecasted coal sales. For additional information, refer to Note 6. “Derivatives and Fair Value Measurements” to the accompanying consolidated financial statements. Unrealized Losses on Foreign Currency Option Contracts. Unrealized losses primarily relate to mark-to-market activity on foreign currency option contracts. For additional information, refer to Note 6. “Derivatives and Fair Value Measurements” to the accompanying consolidated financial statements. Income Tax Benefit (Provision). The income tax benefit recorded during the year ended December 31, 2022 was primarily due to the release of valuation allowance related to Australian NOLs, partially offset by year-over-year increases in pretax income. Refer to Note 8. “Income Taxes” to the accompanying consolidated financial statements for additional information. Net Income Attributable to Common Stockholders The following table presents net income attributable to common stockholders: [[GREPCENT_TABLE]] [["","","","Increase (Decrease)"],["","Year Ended December 31,","","to Income"],["","2022","","2021","","$","","%"],["","(Dollars in millions)"],["Income from continuing operations, net of income taxes","$","1,317.4","","","$","347.4","","","$","970.0","","","279.2","%"],["Income from discontinued operations, net of income taxes","1.7","","","24.0","","","(22.3)","","","(92.9)","%"],["Net income","1,319.1","","","371.4","","","947.7","","","255.2","%"],["Less: Net income attributable to noncontrolling interests","22.0","","","11.3","","","10.7","","","94.7","%"],["Net income attributable to common stockholders","$","1,297.1","","","$","360.1","","","$","937.0","","","260.2","%"]] [[/GREPCENT_TABLE]] Income from Discontinued Operations, Net of Income Taxes. The decrease in income from discontinued operations, net of income taxes during the year ended December 31, 2022 compared to the prior year period was primarily driven by the prior year gain of $24.6 million recognized on the sale of the Wilkie Creek Mine as discussed in Note 17. “Other Events” to the accompanying consolidated financial statements. Net Income Attributable to Noncontrolling Interests. The increase in net income attributable to noncontrolling interests during the year ended December 31, 2022 compared to the prior year period was primarily due to stronger financial results of Peabody’s majority-owned mines in which there is an outside non-controlling interest. Diluted EPS The following table presents diluted EPS: [[GREPCENT_TABLE]] [["","","","Increase (Decrease) to"],["","Year Ended December 31,","","EPS"],["","2022","","2021","","$","","%"],["Diluted EPS attributable to common stockholders:"],["Income from continuing operations","$","8.29","","","$","3.00","","","$","5.29","","","176.3","%"],["Income from discontinued operations","0.02","","","0.22","","","(0.20)","","","(90.9)","%"],["Net income attributable to common stockholders","$","8.31","","","$","3.22","","","$","5.09","","","158.1","%"]] [[/GREPCENT_TABLE]] [[GREPCENT_TABLE]] [["Peabody Energy Corporation","2022 Form 10-K","69"]] [[/GREPCENT_TABLE]] Table of Contents Diluted EPS is commensurate with the changes in results from continuing operations and discontinued operations during that period. Diluted EPS reflects weighted average diluted common shares outstanding of 157.2 million and 112.0 million for the years ended December 31, 2022 and 2021, respectively. Reconciliation of Non-GAAP Financial Measures Adjusted EBITDA is defined as income from continuing operations before deducting net interest expense, income taxes, asset retirement obligation expenses and depreciation, depletion and amortization. Adjusted EBITDA is also adjusted for the discrete items that management excluded in analyzing each of its segment’s operating performance, as displayed in the reconciliations below. [[GREPCENT_TABLE]] [["","Year Ended December 31,"],["","2022","","2021"],["","(Dollars in millions)"],["Income from continuing operations, net of income taxes","$","1,317.4","","","$","347.4"],["Depreciation, depletion and amortization","317.6","","","308.7"],["Asset retirement obligation expenses","49.4","","","44.7"],["Restructuring charges","2.9","","","8.3"],["Asset impairment","11.2","","","\u2014"],["Changes in deferred tax asset valuation allowance and reserves and amortization of basis difference related to equity affiliates","(2.3)","","","(33.8)"],["Interest expense","140.3","","","183.4"],["Net loss (gain) on early debt extinguishment","57.9","","","(33.2)"],["Interest income","(18.4)","","","(6.5)"],["Net mark-to-market adjustment on actuarially determined liabilities","(27.8)","","","(43.4)"],["Unrealized losses on derivative contracts related to forecasted sales","35.8","","","115.1"],["Unrealized losses on foreign currency option contracts","2.3","","","7.5"],["Take-or-pay contract-based intangible recognition","(2.8)","","","(4.3)"],["Income tax (benefit) provision","(38.8)","","","22.8"],["Adjusted EBITDA","$","1,844.7","","","$","916.7"]] [[/GREPCENT_TABLE]] Total Reporting Segment Costs is defined as operating costs and expenses adjusted for the discrete items that management excluded in analyzing each of its segments’ operating performance, as displayed in the reconciliations below: [[GREPCENT_TABLE]] [["","Year Ended December 31,"],["","2022","","2021"],["","(Dollars in millions)"],["Operating costs and expenses","$","3,290.8","","","$","2,553.1"],["Unrealized losses on foreign currency option contracts","(2.3)","","","(7.5)"],["Take-or-pay contract-based intangible recognition","2.8","","","4.3"],["Net periodic benefit credit, excluding service cost","(49.0)","","","(38.3)"],["Total Reporting Segment Costs","$","3,242.3","","","$","2,511.6"]] [[/GREPCENT_TABLE]] The following table presents Total Reporting Segment Costs by reporting segment: [[GREPCENT_TABLE]] [["","Year Ended December 31,"],["","2022","","2021"],["","(Dollars in millions)"],["Seaborne Thermal Mining","$","698.0","","","$","580.9"],["Seaborne Metallurgical Mining","835.2","","","549.5"],["Powder River Basin Mining","997.3","","","836.3"],["Other U.S. Thermal Mining","709.8","","","524.9"],["Corporate and Other","2.0","","","20.0"],["Total Reporting Segment Costs","$","3,242.3","","","$","2,511.6"]] [[/GREPCENT_TABLE]] [[GREPCENT_TABLE]] [["Peabody Energy Corporation","2022 Form 10-K","70"]] [[/GREPCENT_TABLE]] Table of Contents Revenue per Ton and Adjusted EBITDA Margin per Ton are equal to revenue by segment and Adjusted EBITDA by segment, respectively, divided by segment tons sold. Costs per Ton is equal to Revenue per Ton less Adjusted EBITDA Margin per Ton. The following tables present tons sold, revenue, Total Reporting Segment Costs and Adjusted EBITDA by operating segment: [[GREPCENT_TABLE]] [["","Year Ended December 31, 2022"],["","Seaborne Thermal Mining","","Seaborne Metallurgical Mining","","Powder River Basin Mining","","Other U.S. Thermal Mining"],["","(Amounts in millions, except per ton data)"],["Tons sold","15.6","","","6.6","","","82.6","","","18.4"],["Revenue","$","1,345.6","","","$","1,616.9","","","$","1,065.5","","","$","952.2"],["Total Reporting Segment Costs","698.0","","","835.2","","","997.3","","","709.8"],["Adjusted EBITDA","$","647.6","","","$","781.7","","","$","68.2","","","$","242.4"],["Revenue per Ton","$","86.07","","","$","243.78","","","$","12.89","","","$","51.82"],["Costs per Ton","44.65","","","125.92","","","12.06","","","38.63"],["Adjusted EBITDA Margin per Ton","$","41.42","","","$","117.86","","","$","0.83","","","$","13.19"]] [[/GREPCENT_TABLE]] [[GREPCENT_TABLE]] [["","Year Ended December 31, 2021"],["","Seaborne Thermal Mining","","Seaborne Metallurgical Mining","","Powder River Basin Mining","","Other U.S. Thermal Mining"],["","(Amounts in millions, except per ton data)"],["Tons sold","17.3","","","5.5","","","88.4","","","16.9"],["Revenue","$","934.0","","","$","727.7","","","$","971.2","","","$","689.1"],["Total Reporting Segment Costs","580.9","","","549.5","","","836.3","","","524.9"],["Adjusted EBITDA","$","353.1","","","$","178.2","","","$","134.9","","","$","164.2"],["Revenue per Ton","$","54.09","","","$","131.83","","","$","10.99","","","$","40.75"],["Costs per Ton","33.64","","","99.55","","","9.46","","","31.04"],["Adjusted EBITDA Margin per Ton","$","20.45","","","$","32.28","","","$","1.53","","","$","9.71"]] [[/GREPCENT_TABLE]] Free Cash Flow is defined as net cash provided by operating activities less net cash used in investing activities and excludes cash outflows related to business combinations. See the table below for a reconciliation of Free Cash Flow to its most comparable measure under U.S. GAAP. [[GREPCENT_TABLE]] [["","Year Ended December 31,"],["","2022","","2021"],["","(Dollars in millions)"],["Net cash provided by operating activities","$","1,173.6","","","$","420.0"],["Net cash used in investing activities","(28.7)","","","(131.5)"],["Free Cash Flow","$","1,144.9","","","$","288.5"]] [[/GREPCENT_TABLE]] Liquidity and Capital Resources Overview The Company’s primary source of cash is proceeds from the sale of its coal production to customers. The Company has also generated cash from the sale of non-strategic assets, including coal reserves, resources and surface lands, and, from time to time, borrowings under its credit facilities and the issuance of securities. The Company’s primary uses of cash include the cash costs of coal production, capital expenditures, coal reserve lease and royalty payments, debt service costs, capital and operating lease payments, postretirement plans, take-or-pay obligations, post-mining reclamation obligations, collateral and margining requirements, and selling and administrative expenses. Recently, the Company has also used cash for early debt retirements, and, historically, it has also used cash for dividends and share repurchases. [[GREPCENT_TABLE]] [["Peabody Energy Corporation","2022 Form 10-K","71"]] [[/GREPCENT_TABLE]] Table of Contents Any future determinations to return capital to stockholders, such as dividends or share repurchases will depend on a variety of factors, including the restrictions set forth under the Company’s debt and surety agreements, its net income or other sources of cash, liquidity position and potential alternative uses of cash, such as internal development projects or acquisitions, as well as economic conditions and expected future financial results. The Company’s ability to declare dividends or repurchase shares in the future will depend on its future financial performance, which in turn depends on the successful implementation of its strategy and on financial, competitive, regulatory, technical and other factors, general economic conditions, demand for and selling prices of coal and other factors specific to its industry, many of which are beyond the Company’s control. The Company has presently suspended the payment of dividends and share repurchases, as discussed in Part II, Item 5. “Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities.” Liquidity As of December 31, 2022, the Company’s cash balances totaled $1,307.3 million, including approximately $412 million held by U.S. subsidiaries, approximately $863 million held by Australian subsidiaries, and the remainder held by other foreign subsidiaries in accounts predominantly domiciled in the U.S. A significant majority of the cash held by the Company’s foreign subsidiaries is denominated in U.S. dollars. This cash is generally used to support non-U.S. liquidity needs, including capital and operating expenditures in Australia. From time to time, the Company may repatriate excess cash from its foreign subsidiaries to the U.S. During the year ended December 31, 2022, the Company repatriated approximately $1.3 billion. If additional foreign-held cash is repatriated in the future, the Company does not expect restrictions or potential taxes will have a material effect to its near-term liquidity. The Company’s available liquidity increased from $995.9 million as of December 31, 2021 to $1,317.8 million as of December 31, 2022. Available liquidity was comprised of the following: [[GREPCENT_TABLE]] [["","","","December 31,"],["","","","2022","","2021"],["","","","(Dollars in millions)"],["Cash and cash equivalents","","","$","1,307.3","","","$","954.3"],["Credit facility availability","","","3.5","","","15.3"],["Accounts receivable securitization program availability","","","7.0","","","26.3"],["Total liquidity","","","$","1,317.8","","","$","995.9"]] [[/GREPCENT_TABLE]] Collateral Requirements In November 2020, the Company entered into an agreement with the providers of its surety bond portfolio to resolve previous collateral demands. In accordance with the agreement, the Company initially provided $75.0 million of collateral, in the form of letters of credit. The Company subsequently granted second liens on $200.0 million of certain mining equipment and is further required to post an additional $25.0 million of collateral per year from 2021 through 2024 for the benefit of the surety providers. The collateral postings further increase to the extent the Company generates more than $100.0 million of free cash flow (as defined in the surety agreement) in any twelve-month period or has cumulative asset sales in excess of $10.0 million, as of the last quarter end during the term of the agreement. Based upon the Company’s free cash flow since entering into the surety agreement, additional collateral of $102.4 million was posted during the year ended December 31, 2022 and $74.4 million was posted in January 2023, in the form of cash-collateralized letters of credit. The Company is unable to accurately estimate future additional collateral postings due to the sensitivity of free cash flow to external market factors such as coal pricing. Under the agreement, the relevant surety providers agreed to a standstill through December 31, 2025, during which time, the surety providers will not demand collateral incremental to that described above, draw on letters of credit posted for the benefit of themselves or cancel any existing surety bond. The Company will not pay dividends or make share repurchases during the standstill period, unless otherwise agreed between parties. The Company is currently in negotiations with its surety providers to amend the existing agreement, including a modification to permit shareholder returns. [[GREPCENT_TABLE]] [["Peabody Energy Corporation","2022 Form 10-K","72"]] [[/GREPCENT_TABLE]] Table of Contents Collateralized Letter of Credit Agreement In February 2022, the Company entered into a new agreement, which provides up to $250.0 million of capacity for irrevocable standby letters of credit, expected to primarily support reclamation bonding requirements. The agreement requires the Company to provide cash collateral at a level of 103% of the aggregate amount of letters of credit outstanding under the arrangement (limited to $5.0 million total excess collateralization.) Outstanding letters of credit bear a fixed fee in the amount of 0.75% per annum. The Company receives a variable deposit rate on the amount of cash collateral posted in support of letters of credit. The agreement has an initial expiration date of December 31, 2025. At December 31, 2022, letters of credit of $103.3 million were outstanding under the agreement, which were collateralized by cash of $111.0 million, which includes interest earned on deposits. Margin Requirements From time to time, the Company enters into hedging arrangements, including economic hedging arrangements, to manage various risks, including coal price volatility. Most hedging arrangements require the Company to post margin with its clearing broker based on the value of the related instruments and other credit factors. If the fair value of its exchange-cleared hedge portfolio moves significantly, the Company could be required to post additional margin, which could negatively impact its liquidity. During 2022, the Company’s margin requirements have been driven primarily by coal derivative contracts entered into in the first half of 2021 related to 1.9 million metric tons of production at the Wambo Underground Mine in the Company’s Seaborne Thermal Mining segment. Based on planned production, the contracts were expected to settle at a rate of 1.2 million metric tons in 2022 and 0.7 million metric tons in 2023. High demand and tight supply for coal globally during 2022 has resulted in a substantial rise in seaborne thermal coal prices, which has been amplified by the Russian-Ukrainian conflict resulting in unprecedented upward volatility in Newcastle coal pricing since late February 2022. The Newcastle financial price reached over $450 per metric ton during 2022, compared to approximately $166 per metric ton on December 31, 2021. As a result, the Company’s total initial and variation margin requirements reached approximately $750 million during March 2022. Margin is returned to the Company upon reductions in the underlying market coal price or, absent such reductions, cash is recovered as the Company delivers coal into the market at spot prices. In order to meet its near-term liquidity requirements, particularly with respect to cash margin, the Company entered into a $150 million unsecured revolving credit facility in March 2022. Concurrently with this agreement, the Company entered into an agreement for at-the-market equity offerings of up to $225.0 million of the Company’s common stock. During the three months ended March 31, 2022, the Company borrowed and repaid $225.0 million under the revolving credit facility using net proceeds of $222.0 million from at-the-market issuances of 10.1 million shares of common stock and available cash. The Company made no additional borrowings and terminated the facility prior to its scheduled 2025 maturity, on August 4, 2022. To reduce exposure to additional margin requirements, during 2022, the Company converted 0.8 million metric tons of financial hedges into fixed price physical sales. As of December 31, 2022, 0.6 million metric tons remain outstanding and are projected to settle during the first half of 2023. On December 31, 2022, the Company had $255.5 million of margin posted. On February 17, 2023, the Company had $80.5 million of margin posted. For additional information regarding the Company’s coal derivative contracts, refer to Part II, Item 7A. “Quantitative and Qualitative Disclosures About Market Risk.” [[GREPCENT_TABLE]] [["Peabody Energy Corporation","2022 Form 10-K","73"]] [[/GREPCENT_TABLE]] Table of Contents Indebtedness The Company’s total indebtedness as of December 31, 2022 and 2021 is presented in the table below. [[GREPCENT_TABLE]] [["","December 31,"],["Debt Instrument (defined below, as applicable)","2022","","2021"],["","(Dollars in millions)"],["6.000% Senior Secured Notes due March 2022 (2022 Notes)","$","\u2014","","","$","23.1"],["8.500% Senior Secured Notes due December 2024 (2024 Peabody Notes)","\u2014","","","62.6"],["10.000% Senior Secured Notes due December 2024 (2024 Co-Issuer Notes)","\u2014","","","193.9"],["Senior Secured Term Loan due 2024 (Co-Issuer Term Loans)","\u2014","","","206.0"],["6.375% Senior Secured Notes due March 2025 (2025 Notes)","\u2014","","","334.9"],["Senior Secured Term Loan due 2025, net of original issue discount (Senior Secured Term Loan)","\u2014","","","322.8"],["3.250% Convertible Senior Notes due March 2028 (2028 Convertible Notes)","320.0","","","\u2014"],["Finance lease obligations","23.6","","","29.3"],["Less: Debt issuance costs","(9.8)","","","(34.8)"],["","333.8","","","1,137.8"],["Less: Current portion of long-term debt","13.2","","","59.6"],["Long-term debt","$","320.6","","","$","1,078.2"]] [[/GREPCENT_TABLE]] As further described below, during 2021, the Company completed a significant debt restructuring to extend maturities on its existing debt and obtain covenant relief. Subsequent to these restructuring activities, the Company utilized various methods allowable or required under its relevant debt agreements to retire all of its senior secured long-term debt by December 31, 2022, as only the 2028 Convertible Notes, which are further described below, and finance lease obligations remain outstanding. The Company’s remaining indebtedness requires estimated contractual principal and interest payments, assuming interest rates in effect at December 31, 2022, of approximately $25 million in 2023, $16 million in 2024, $14 million in 2025, $13 million in 2026, $11 million in 2027 and $322 million thereafter. Cash interest payments amounted to $118.5 million, $174.9 million and $126.9 million during the years ended December 31, 2022, 2021, and 2020, respectively. 2021 Debt Restructuring During the first quarter of 2021, the Company completed a series of financing transactions to provide the Company with maturity extensions and covenant relief, while allowing it to maintain near-term operating liquidity. These transactions included a senior notes exchange, a revolving credit facility exchange, various amendments to the Company’s existing debt agreements and a support agreement with the Company’s surety bond providers. These transactions were preceded by an organizational realignment in which the Company formed certain wholly-owned subsidiaries (the Co-Issuers) to indirectly own and conduct the operations of the Company’s Wilpinjong Mine in Australia and the designation of such entities as unrestricted subsidiaries under the Company’s then-existing credit agreement (Credit Agreement) and senior notes’ indenture. The senior notes exchange involved the tender of $398.7 million aggregate principal amount of the Company’s 2022 Notes for aggregate consideration consisting of (a) $193.9 million aggregate principal amount of new 2024 Co-Issuer Notes, (b) $195.1 million aggregate principal amount of new 2024 Peabody Notes issued by the Company and (c) a cash payment of approximately $9.4 million. Concurrently with the senior notes exchange, the Company solicited consents from holders of the 2022 Notes to certain proposed amendments to its existing senior notes’ indenture to (i) eliminate substantially all of the restrictive covenants, certain events of default applicable to the 2022 Notes and certain other provisions contained in their indenture and (ii) release the collateral securing the 2022 Notes and eliminate certain other related provisions. The Company received the requisite consents from holders of the 2022 Notes and entered into a supplemental indenture to reflect such amendments. [[GREPCENT_TABLE]] [["Peabody Energy Corporation","2022 Form 10-K","74"]] [[/GREPCENT_TABLE]] Table of Contents The Company also restructured $216.0 million of existing revolving loans under the Credit Agreement by (i) paying down $10.0 million aggregate principal amount of such loans, (ii) compelling the Co-Issuers to incur $206.0 million of Co-Issuer Term Loans under a separate credit agreement, (iii) entering into a letter of credit facility (the Company LC Agreement) and (iv) amending the Credit Agreement. Under the Company LC Agreement, the Company obtained a $324.0 million letter of credit facility under which its existing letters of credit under the Credit Agreement were deemed to be issued. Undrawn letters of credit under the Company LC Agreement bear interest at 6.00% per annum and unused commitments are subject to a 0.50% per annum commitment fee. The Company LC Agreement was subsequently amended during 2022 to mandatorily reduce its capacity by approximately $22 million to make allowable certain previously restricted payments for joint venture investments. The amendment creates an investment basket which allows payments of $30.0 million per year specifically limited to investment in renewable energy-related projects. The Company has no contractual commitment for such project investment. Unused portions of the basket carryover from year-to-year, and the total amount of investment will further reduce the credit facility capacity by a like amount, or a minimum of $10.0 million per year, through the maturity of the credit facility. In February 2023, the Company LC Agreement was further amended to reduce its capacity by an additional $65.0 million, accelerate its expiration date to December 31, 2023 from December 31, 2024, and eliminate the prepayment premium due upon any reduction of commitments thereunder prior to July 29, 2023.  The Company expects to utilize its collateralized letter of credit agreement to offset reductions in the capacity of the Company LC Agreement. Completion of the 2021 debt restructuring transactions allowed the Company to finalize the surety transaction support agreement described above. 2021 Debt Retirements During the remainder of 2021, the Company retired $293.3 million of debt principal for cash at an aggregate cost of $250.3 million, and $106.1 million of debt principal in exchange for 10.0 million shares of its common stock, as further described below. In March 2021, as a requirement of the senior notes exchange, the Company purchased $22.4 million of the 2024 Peabody Notes at 80% of their accreted value, plus accrued and unpaid interest. In June 2021, the Company announced an at-the-market equity offering program pursuant to which, as amended, the Company could offer and sell up to 32.5 million shares of its common stock. During the year ended December 31, 2021, the Company sold approximately 24.8 million shares for net cash proceeds of $269.8 million. Such proceeds were utilized, in part, for the retirement of debt as described below. During the year ended December 31, 2021, the Company retired $91.4 million of 2024 Peabody Notes, $117.8 million of 2025 Notes and $61.7 million of its Senior Secured Term Loan primarily through various open market purchases at an aggregate cost of $232.4 million. Also during the year ended December 31, 2021, the Company completed multiple bilateral transactions with note holders in which the Company issued an aggregate 10.0 million shares of its common stock in exchange for $37.3 million aggregate principal amount of the 2022 Notes, $47.2 million aggregate principal amount of the 2025 Notes and $21.6 million aggregate principal amount of the 2024 Peabody Notes. 2022 Debt Retirements During 2022, the Company retired $1,143.8 million of debt principal for cash at an aggregate cost of $1,172.0 million, as further described below. Such amounts exclude the $225.0 million principal amount borrowed and repaid under the now-terminated revolving facility described above. On March 31, 2022, the Company retired the remaining principal balance of 2022 Notes upon maturity for $23.1 million. [[GREPCENT_TABLE]] [["Peabody Energy Corporation","2022 Form 10-K","75"]] [[/GREPCENT_TABLE]] Table of Contents During the three months ended March 31, 2022, $62.5 million principal amount of the 2024 Peabody Notes was retired using proceeds from the offering of 2028 Convertible Notes, as further described below, and the remaining $0.1 million principal amount was retired through a mandatory repurchase offer required under the terms of their indenture and the Company LC Agreement. Such mandatory repurchase offers were required when the Company made open market repurchases of its debt. In general, the repurchase offers equated to 25% of the principal amount of priority lien debt repurchased in the preceding quarter at a price equal to the weighted average repurchase price paid over that quarter. In addition to the $0.1 million principal amount of 2024 Peabody Notes repurchased through such offers, the Company repurchased $42.2 million of aggregate priority lien obligations under the Company LC Agreement during 2022 at approximately 95%. The repurchases of Company LC Agreement commitments were effected by the posting of $40.1 million of collateral with the administrative agent and did not reduce the availability under the facility. In March 2022, $257.4 million principal amount of the 2025 Notes was retired using proceeds from the offering of 2028 Convertible Notes, as further described below. The remaining 2025 Notes were retired through an open market repurchase of $11.4 million principal amount at 98.00% in September 2022 and, in accordance with the notes’ indenture, a voluntary prepayment of $66.1 million principal amount at 101.59% in December 2022. The Senior Secured Term Loan was retired through various open market purchases of $44.1 million principal amount throughout 2022 at an aggregate cost of $42.1 million, scheduled quarterly principal amortization payments of $3.0 million, and, in accordance with the terms of the Credit Agreement, a voluntary prepayment of $276.2 million principal amount at par in December 2022. The 2024 Co-Issuer Notes and the Co-Issuer Term Loans were subject to mandatory prepayment offers at the end of each six-month period, beginning with June 30, 2021, whereby the Excess Cash Flow (as defined in the 2024 Co-Issuer Notes indenture) generated by the Wilpinjong Mine during each such period could be applied to the principal of such notes and loans on a pro rata basis, provided that the liquidity attributable to the Wilpinjong Mine would not fall below $60.0 million. Such prepayments could be accepted or declined at the option of the debt holders. Based upon the Wilpinjong Mine’s results for the six-month periods ended December 31, 2021 and June 30, 2022 and the resultant mandatory prepayment offers, during 2022, the Company prepaid $18.5 million principal amount of 2024 Co-Issuer Notes at an aggregate cost of $19.2 million and $17.2 million principal amount of Co-Issuer Term Loans at par. Voluntary repurchases of Co-Issuer Term Loans were permissible through various methods, including a modified Dutch auction process in which the Company could solicit acceptable prices from holders. During the year ended December 31, 2022, the Company solicited bids from all holders of Co-Issuer Term Loans at various dates for the repurchase of the remaining outstanding principal amount, resulting in the valid tender and purchase of $185.9 million principal amount at an aggregate cost of $195.8 million. The underlying terms of the 2024 Co-Issuer Notes and Co-Issuer Term Loans required parity between the holders of Co-Issuer Term Loans and holders of the 2024 Co-Issuer Notes with respect to repurchase offers such as those undertaken through the auction processes described above. As such, the Company solicited commensurate bids from all holders of 2024 Co-Issuer Notes at various dates during the year ended December 31, 2022 for the repurchase of the remaining outstanding principal amount, resulting in the valid tender and purchase of $147.3 million principal amount at an aggregate cost of $154.1 million. Subsequent to the modified Dutch auction processes and related transactions, during the fourth quarter of 2022, the Company voluntarily prepaid the remaining $28.1 million principal amount of 2024 Co-Issuer Notes and $2.9 million principal amount of Co-Issuer Term Loans at an aggregate cost of $32.8 million, including certain make whole premium amounts. 3.250% Convertible Senior Notes due 2028 On March 1, 2022, through a private offering, the Company issued $320.0 million in aggregate principal amount of 3.250% Convertible Senior Notes due 2028 (the 2028 Convertible Notes). The 2028 Convertible Notes are senior unsecured obligations of the Company and are governed under an indenture. The Company used the proceeds of the offering of the 2028 Convertible Notes to redeem the remaining $62.5 million of its outstanding 2024 Peabody Notes and, together with available cash, approximately $257.4 million of its outstanding 2025 Notes, and to pay related premiums, fees and expenses relating to the offering of the 2028 Convertible Notes and the redemptions. The 2028 Convertible Notes will mature on March 1, 2028, unless earlier converted, redeemed or repurchased in accordance with their terms, as described in Note 10. “Long-term Debt” of the accompanying consolidated financial statements. The 2028 Convertible Notes will bear interest at a rate of 3.250% per year payable semi-annually in arrears on March 1 and September 1 of each year. [[GREPCENT_TABLE]] [["Peabody Energy Corporation","2022 Form 10-K","76"]] [[/GREPCENT_TABLE]] Table of Contents During the fourth quarter of 2022, the Company’s reported common stock prices reached levels which prompted the conversion feature of the 2028 Convertible Notes. As a result, the 2028 Convertible Notes are convertible at the option of the holders during the first quarter of 2023. The Company cannot currently satisfy the conversion obligation in cash because the terms of the Credit Agreement generally prohibit the Company from retiring unsecured debt with cash. It is the Company’s current intent and policy to settle any conversions of notes through shares of its common stock. Through February 17, 2023, the Company has not received any conversion requests and does not anticipate receiving any conversion requests in the near term as the market value of the 2028 Convertible Notes exceeds their conversion value. Covenant Compliance The Company was compliant with all relevant covenants under its debt agreements at December 31, 2022, including the minimum aggregate liquidity requirement under the Company LC Agreement which requires the Company’s restricted subsidiaries to maintain minimum aggregate liquidity of $125.0 million at the end of each quarter through December 31, 2023. The Company’s restricted subsidiaries’ relevant liquidity amounted to $1,250.4 million at December 31, 2022. Accounts Receivable Securitization Program As described in Note 20. “Financial Instruments, Guarantees With Off-Balance-Sheet Risk and Other Guarantees” of the accompanying consolidated financial statements, the Company entered into an accounts receivable securitization program during 2017. The securitization program was amended in January 2022 to extend its maturity to January 2025 and reduce the available funding capacity from $250.0 million to $175.0 million. Funding capacity is limited to the availability of eligible receivables and is accounted for as a secured borrowing. Funding capacity under the program may also be utilized for letters of credit in support of other obligations. At December 31, 2022, the Company had no outstanding borrowings and $168.0 million of letters of credit outstanding under the program, which were primarily in support of portions of the Company’s reclamation obligations. The Company had no cash collateral posted under the Securitization Program at December 31, 2022. The securitization program was amended again in February 2023 to increase the available funding capacity to $225.0 million and adjust the relevant interest rate for borrowings to a secured overnight financing rate (SOFR). Capital Expenditures For 2023, the Company is targeting total capital expenditures of approximately $325 million. Approximately $200 million of such amount is appropriated to major projects and growth capital expenditures, including approximately $120 million for the initial redevelopment of the Company’s North Goonyella mine. Other Requirements The Company will incur significant future cash outflows for certain liabilities related to its prior mining activities and former employees. Such cash flows pertain to postretirement benefit plans, work-related injuries and illnesses, defined benefit pension plans, mine reclamation and end-of-mine closure costs and exploration obligations and are estimated to amount to approximately $235 million in 2023, $100 million in 2024, $110 million in 2025, $100 million in 2026, $100 million in 2027 and $1,685 million thereafter. The Company has various short- and long-term take-or-pay arrangements in Australia and the U.S. associated with rail and port commitments for the delivery of coal, including amounts relating to export facilities. The estimated future cash flows associated with such arrangements are approximately $100 million in 2023, $110 million in 2024, $105 million in 2025, $100 million in 2026, $100 million in 2027 and $875 million thereafter. The Company’s operating lease commitments, excluding potential contingent rental amounts, will require cash payments of approximately $19 million in 2023, $7 million in 2024 and $4 million thereafter. [[GREPCENT_TABLE]] [["Peabody Energy Corporation","2022 Form 10-K","77"]] [[/GREPCENT_TABLE]] Table of Contents Cash Flows and Free Cash Flow The following table summarizes the Company’s cash flows for the years ended December 31, 2022 and 2021, as reported in the accompanying consolidated financial statements. Free Cash Flow is a financial measure not recognized in accordance with U.S. GAAP. Refer to the “Reconciliation of Non-GAAP Financial Measures” section above for definitions and reconciliations to the most comparable measures under U.S. GAAP. [[GREPCENT_TABLE]] [["","Year Ended December 31,"],["","2022","","2021"],["","(Dollars in millions)"],["Net cash provided by operating activities","$","1,173.6","","","$","420.0"],["Net cash used in investing activities","(28.7)","","","(131.5)"],["Net cash used in financing activities","(681.6)","","","(43.4)"],["Net change in cash, cash equivalents and restricted cash","463.3","","","245.1"],["Cash, cash equivalents and restricted cash at beginning of period","954.3","","","709.2"],["Cash, cash equivalents and restricted cash at end of period","$","1,417.6","","","$","954.3"],["Net cash provided by operating activities","$","1,173.6","","","$","420.0"],["Net cash used in investing activities","(28.7)","","","(131.5)"],["Free Cash Flow","$","1,144.9","","","$","288.5"]] [[/GREPCENT_TABLE]] Operating Activities. The net increase in net cash provided by operating activities for the year ended December 31, 2022 compared to the prior year was driven by a year-over-year increase in cash from the Company’s mining operations ($879.0 million) partially offset by increased cash utilized to satisfy the margin requirements associated with derivative financial instruments ($125.4 million). Investing Activities. The decrease in net cash used in investing activities for the year ended December 31, 2022 compared to the prior year was driven by increased cash receipts from Middlemount and other related parties ($126.7 million) and increased asset disposal proceeds ($22.8 million), partially offset by increased capital expenditures and payments of capital accruals ($48.5 million). Financing Activities. The increase in net cash used in financing activities for the year ended December 31, 2022 compared to the prior year was driven by higher repayments of debt principal ($1,122.0 million), decreased proceeds from common stock issuances in the current year ($47.8 million) and higher distributions to non-controlling interests ($13.6 million) partially offset by proceeds from long-term debt issuances of $545.0 million during the year ended December 31, 2022. Off-Balance-Sheet Arrangements In the normal course of business, the Company is a party to various guarantees and financial instruments that carry off-balance-sheet risk and are not reflected in the accompanying consolidated balance sheets. At December 31, 2022, such instruments included $1,376.8 million of surety bonds and $569.6 million of letters of credit. Such financial instruments provide support for its reclamation bonding requirements, lease obligations, insurance policies and various other performance guarantees. The Company periodically evaluates the instruments for on-balance-sheet treatment based on the amount of exposure under the instrument and the likelihood of required performance. The Company does not expect any material losses to result from these guarantees or off-balance-sheet instruments in excess of liabilities provided for in its consolidated balance sheets. [[GREPCENT_TABLE]] [["Peabody Energy Corporation","2022 Form 10-K","78"]] [[/GREPCENT_TABLE]] Table of Contents As of December 31, 2022, the Company was party to financial instruments with off-balance sheet risk in support of the following obligations: [[GREPCENT_TABLE]] [["","Reclamation","","Health and welfare (1)","","Contract performance (2)","","Leased property and equipment","","Other (3)","","Total"],["","(Dollars in millions)"],["Surety bonds and bank guarantees","$","1,250.1","","","$","40.5","","","$","35.2","","","$","35.0","","","$","16.0","","","$","1,376.8"],["Letters of credit outstanding under letter of credit facilities","300.8","","","91.9","","","3.9","","","5.0","","","\u2014","","","401.6"],["Letters of credit outstanding under accounts receivable securitization program","137.0","","","19.2","","","11.8","","","\u2014","","","\u2014","","","168.0"],["","1,687.9","","","151.6","","","50.9","","","40.0","","","16.0","","","1,946.4"],["Less: Letters of credit in support of surety bonds (4)","(431.7)","","","(31.9)","","","(4.1)","","","(1.2)","","","\u2014","","","(468.9)"],["Obligations supported, net","$","1,256.2","","","$","119.7","","","$","46.8","","","$","38.8","","","$","16.0","","","$","1,477.5"]] [[/GREPCENT_TABLE]] (1)    Obligations include pension and health care plans, workers’ compensation, and property and casualty insurance. (2)    Obligations pertain to customer and vendor contracts. (3)    Obligations primarily pertain to the disturbance or alteration of public roadways in connection with the Company’s mining activities that is subject to future restoration. (4)    Serve as collateral for certain surety bonds at the request of surety bond providers. Not presented in the above table is approximately $187 million of cash collateral posted by the Company and included in the accompanying consolidated balance sheet at December 31, 2022. Such collateral is primarily in support of the financial instruments noted above, including in relation to the Company’s collateralized letter of credit agreement, mandatory repurchases of credit facility capacity, additional collateral in support of certain surety bonds, and amounts held directly with beneficiaries which are not supported by surety bonds. Financial assurances associated with new reclamation bonding requirements, surety bonds or other obligations may require additional collateral in the form of cash or letters of credit causing a decline in the Company’s liquidity. As described in Note 20. “Financial Instruments, Guarantees With Off-Balance-Sheet Risk and Other Guarantees” to the accompanying consolidated financial statements, the Company is required to provide various forms of financial assurance in support of its mining reclamation obligations in the jurisdictions in which it operates. Such requirements are typically established by statute or under mining permits. At December 31, 2022, the Company had total asset retirement obligations of $750.0 million which were backed by a combination of surety bonds, bank guarantees and letters of credit. Bonding requirement amounts may differ significantly from the related asset retirement obligation because such requirements are calculated under the assumption that reclamation begins currently, whereas the Company’s accounting liabilities are discounted from the end of a mine’s economic life (when final reclamation work would begin) to the balance sheet date. Guarantees and Other Financial Instruments with Off-Balance Sheet Risk. See Note 20. “Financial Instruments, Guarantees With Off-Balance-Sheet Risk and Other Guarantees” to the accompanying consolidated financial statements for a discussion of the Company’s accounts receivable securitization program and guarantees and other financial instruments with off-balance sheet risk. Critical Accounting Policies and Estimates The Company’s discussion and analysis of its financial condition, results of operations, liquidity and capital resources is based upon its financial statements, which have been prepared in accordance with U.S. GAAP. The Company is also required under U.S. GAAP to make estimates and judgments that affect the reported amounts of assets, liabilities, revenue and expenses, and related disclosure of contingent assets and liabilities. On an ongoing basis, the Company evaluates its estimates. The Company bases its estimates on historical experience and on various other assumptions that it believes are reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates. [[GREPCENT_TABLE]] [["Peabody Energy Corporation","2022 Form 10-K","79"]] [[/GREPCENT_TABLE]] Table of Contents Asset Retirement Obligations. The Company’s asset retirement obligations primarily consist of spending estimates for surface land reclamation and support facilities at both surface and underground mines in accordance with applicable reclamation laws and regulations in the U.S. and Australia as defined by each mining permit. Asset retirement obligations are determined for each mine using various estimates and assumptions including, among other items, estimates of disturbed acreage as determined from engineering data, estimates of future costs to reclaim the disturbed acreage and the timing of these cash flows, escalated for inflation and then discounted using a credit-adjusted, risk-free rate. As changes in estimates occur (such as mine plan revisions, changes in estimated costs or changes in timing of the performance of reclamation activities), the revisions to the obligation and asset are recognized at the appropriate credit-adjusted, risk-free rate. If the Company’s assumptions do not materialize as expected, actual cash expenditures and costs that it incurs could be materially different than currently estimated. Moreover, regulatory changes could increase its obligation to perform reclamation and mine closing activities. Amortization associated with the Company’s asset retirement obligation assets of $26.5 million for the year ended December 31, 2022 was included in “Depreciation, depletion and amortization” in the Company’s consolidated statements of operations. Asset retirement obligation expense, consisting of both accretion expense and changes in estimates for the Company’s inactive locations, for the year ended December 31, 2022 was $49.4 million and payments totaled $52.6 million. See Note 12. “Asset Retirement Obligations” to the accompanying consolidated financial statements for additional information regarding the Company’s asset retirement obligations. Impairment of Long-Lived Assets. The Company evaluates its long-lived assets held and used in operations for impairment as events and changes in circumstances indicate that the carrying amount of such assets might not be recoverable. Factors that would indicate potential impairment to be present include, but are not limited to, a sustained history of operating or cash flow losses, an unfavorable change in earnings and cash flow outlook, prolonged adverse industry or economic trends and a significant adverse change in the extent or manner in which a long-lived asset is being used or in its physical condition. The Company generally does not view short-term declines in thermal and metallurgical coal prices as a triggering event for conducting impairment tests because of historic price volatility. However, the Company generally views a sustained trend of depressed coal pricing (for example, over periods exceeding one year) as an indicator of potential impairment. Because of the volatile and cyclical nature of coal prices and demand, it is reasonably possible that coal prices may decrease and/or fail to improve in the near term, which, absent sufficient mitigation such as an offsetting reduction in the Company’s operating costs, may result in the need for future adjustments to the carrying value of its long-lived mining assets and mining-related investments. Assets are grouped at the lowest level for which there are identifiable cash flows that are largely independent of the cash flows of other groups of assets. For its active mining operations, the Company generally groups such assets at the mine level, or the mining complex level for mines that share infrastructure, with the exception of impairment evaluations triggered by mine closures. In those cases involving mine closures, the related assets are evaluated at the individual asset level for remaining economic life based on transferability to ongoing operating sites or for expected salvage. For its development and exploration properties and portfolio of surface land and coal reserve and resource holdings, the Company considers several factors to determine whether to evaluate those assets individually or on a grouped basis for purposes of impairment testing. Such factors include geographic proximity to one another, the expectation of shared infrastructure upon development based on future mining plans and whether it would be most advantageous to bundle such assets in the event of a sale to a third party. When indicators of impairment are present, the Company evaluates its long-lived assets for recoverability by comparing the estimated undiscounted cash flows in the LOM plan expected to be generated by those assets under various assumptions to their carrying amounts. If such undiscounted cash flows indicate that the carrying value of the asset group is not recoverable, impairment losses are measured by comparing the estimated fair value of the asset group to its carrying amount. As quoted market prices are unavailable for the Company’s individual mining operations, fair value is determined through the use of an expected present value technique based on the income approach, except for non-strategic coal reserves and resources, surface lands and undeveloped coal properties excluded from its long-range mine planning. In those cases, a market approach is utilized based on the most comparable market multiples available. The estimated future cash flows and underlying assumptions used to assess recoverability and, if necessary, measure the fair value of the Company’s long-lived mining assets are derived from those developed in connection with its planning and budgeting process. The Company believes its assumptions to be consistent with those a market participant would use for valuation purposes. The most critical assumptions underlying its projections and fair value estimates include those surrounding future tons sold, coal prices for unpriced coal, production costs (including costs for labor, commodity supplies and contractors), transportation costs, foreign currency exchange rates and a risk-adjusted, cost of capital (all of which generally constitute unobservable Level 3 inputs under the fair value hierarchy), in addition to market multiples for non-strategic coal reserves and resources, surface lands and undeveloped coal properties excluded from the Company’s long-range mine planning (which generally constitute Level 2 inputs under the fair value hierarchy). [[GREPCENT_TABLE]] [["Peabody Energy Corporation","2022 Form 10-K","80"]] [[/GREPCENT_TABLE]] Table of Contents Impairment charges related to long-lived assets of $9.5 million were recorded for the year ended December 31, 2022. The assumptions used are based on the Company’s best knowledge at the time it prepares its analysis but can vary significantly due to the volatile and cyclical nature of coal prices and demand, regulatory issues, unforeseen mining conditions, commodity prices and cost of labor. These factors may cause the Company to be unable to recover all or a portion of the carrying value of its long-lived assets. See Note 3. “Asset Impairment” to the accompanying consolidated financial statements for additional information regarding impairment charges. Income Taxes. Peabody accounts for income taxes in accordance with accounting guidance which requires deferred tax assets and liabilities to be recognized using enacted tax rates for the effect of temporary differences between the book and tax bases of recorded assets and liabilities. The guidance also requires that deferred tax assets be reduced by a valuation allowance if it is “more likely than not” that some portion or all of the deferred tax asset will not be realized. In its evaluation of the need for a valuation allowance, Peabody takes into account various factors, including the expected level of future taxable income, available tax planning strategies, reversals of existing taxable temporary differences and taxable income in carryback years. During the year ended December 31, 2022, the Company released valuation allowances of $74.7 million recorded against the Australian NOLs and net deferred tax asset position due to the significant current year utilization of NOLs and expected future realization of the deferred tax assets. At December 31, 2022, the Company maintained valuation allowances for income taxes totaling $1,451.0 million. If actual results differ from the assumptions made in the annual evaluation of its valuation allowance, Peabody may record a change in valuation allowance through income tax expense in the period such determination is made. Peabody’s liability for unrecognized tax benefits contains uncertainties because management is required to make assumptions and to apply judgment to estimate the exposures associated with its various filing positions. Peabody recognizes the tax benefit from an uncertain tax position only if it is “more likely than not” that the tax position will be sustained on examination by the taxing authorities, based on the technical merits of the position. The tax benefits recognized in the financial statements from such a position must be measured based on the largest benefit that has a greater than 50% likelihood of being realized upon ultimate settlement. At December 31, 2022, the Company had net unrecognized tax benefits of $9.5 million included in recorded liabilities in the consolidated balance sheet. Peabody believes that its judgments and estimates are reasonable; however, to the extent it prevails in matters for which liabilities have been established, or are required to pay amounts in excess of its recorded liabilities, the Company’s effective tax rate in a given period could be materially affected. See Note 8. “Income Taxes” to the accompanying consolidated financial statements for additional information regarding valuation allowances and unrecognized tax benefits. Postretirement Benefit and Pension Liabilities. Peabody has long-term liabilities for its employees’ postretirement benefit costs and defined benefit pension plans. Its pension obligations are funded in accordance with the provisions of applicable laws and the Company’s policies. Liabilities for postretirement benefit costs are funded at its discretion. For the year ended December 31, 2022, Peabody recorded a total benefit related to postretirement benefit costs and pension of $49.1 million, while employer contributions were $15.9 million. An actuarial gain of $30.6 million was recorded for the year ended December 31, 2022. Each of these liabilities is actuarially determined and Peabody uses various actuarial assumptions, including the discount rate, future cost trends, mortality tables, demographic assumptions and expected asset returns to estimate the costs and obligations for these items. Peabody’s discount rate is determined by utilizing a hypothetical bond portfolio model which approximates the future cash flows necessary to service its liabilities. The Company makes assumptions related to future trends for medical care costs in the estimates of postretirement benefit costs. Its medical trend assumption is developed by annually examining the historical trend of cost per claim data. In deciding which mortality tables to use, the Company periodically reviews its population’s actual mortality experience and evaluates results against its current assumptions as well as consider recent mortality tables published by the Society of Actuaries Retirement Plans Experience Committee in order to select mortality tables for use in its year end valuations. In addition, the Company makes assumptions related to rates of return on plan assets. If its assumptions do not materialize as expected, actual cash expenditures and costs that Peabody incurs could differ materially from its current estimates. Moreover, regulatory changes could affect Peabody’s obligation to satisfy these or additional obligations. [[GREPCENT_TABLE]] [["Peabody Energy Corporation","2022 Form 10-K","81"]] [[/GREPCENT_TABLE]] Table of Contents For the Company’s postretirement benefit obligation, assumed discount rates and health care cost trend rates have a significant effect on the expense and liability amounts reported for its health care plans. Below the Company has provided two separate sensitivity analyses to demonstrate the significance of these assumptions in relation to reported amounts. [[GREPCENT_TABLE]] [["","For Year Ended December 31, 2022"],["","One-Percentage- Point Increase","","One-Percentage- Point Decrease"],["","(Dollars in millions)"],["Health care cost trend rate:"],["Effect on total net periodic postretirement benefit cost","$","0.5","","","$","(0.4)"],["Effect on total postretirement benefit obligation","$","11.3","","","$","(10.2)"]] [[/GREPCENT_TABLE]] [[GREPCENT_TABLE]] [["","For Year Ended December 31, 2022"],["","One-Half Percentage- Point Increase","","One-Half Percentage- Point Decrease"],["","(Dollars in millions)"],["Discount rate:"],["Effect on total net periodic postretirement benefit cost","$","0.9","","","$","(0.9)"],["Effect on total postretirement benefit obligation","$","(6.0)","","","$","6.4"],["Expected return on assets:"],["Effect on total net periodic postretirement benefit cost","$","(0.1)","","","$","0.1"]] [[/GREPCENT_TABLE]] For the Company’s pension obligation, assumed discount rates and expected returns on assets have a significant effect on the expense and funded status amounts reported for its defined benefit pension plans. Below the Company has provided two separate sensitivity analyses to demonstrate the significance of these assumptions in relation to reported amounts. [[GREPCENT_TABLE]] [["","For Year Ended December 31, 2022"],["","One-Half Percentage- Point Increase","","One-Half Percentage- Point Decrease"],["","(Dollars in millions)"],["Discount rate:"],["Effect on total net periodic pension cost","$","2.4","","","$","(2.7)"],["Effect on defined benefit pension plans\u2019 projected benefit obligation","$","(5.0)","","","$","5.4"],["Expected return on assets:"],["Effect on total net periodic pension cost","$","(3.7)","","","$","3.7"]] [[/GREPCENT_TABLE]] As a result of discretionary contributions made in recent years, its defined benefit pension plans have become nearly fully funded. As a result of the funding level, the asset allocation mix reflected Peabody’s target asset mix of 100% fixed income investments and the pensions plans’ assets provide a significant hedge to the funded status against interest rate movements. If the discount rate moves, Peabody’s actual results would be different than those shown above as substantially all of the change in the discount rate should be offset by changes to the expected return on plan assets. See Note 13. “Postretirement Health Care and Life Insurance Benefits” and Note 14. “Pension and Savings Plans” to the accompanying consolidated financial statements for additional information regarding postretirement benefit and pension plans. Contingent liabilities. From time to time, Peabody is subject to legal and environmental matters related to its continuing and discontinued operations and certain historical, non-coal producing operations. In connection with such matters, the Company is required to assess the likelihood of any adverse judgments or outcomes, as well as potential ranges of probable losses. A determination of the amount of reserves required for these matters is made after considerable analysis of each individual issue. Peabody accrues for legal and environmental matters within “Operating costs and expenses” when it is probable that a liability has been incurred and the amount of the loss can be reasonably estimated. If a range of possible loss exists and no anticipated loss within the range is more likely than any other anticipated loss, the Company records the accrual at the low end of the range, in accordance with Accounting Standards Codification 450, “Contingencies.” [[GREPCENT_TABLE]] [["Peabody Energy Corporation","2022 Form 10-K","82"]] [[/GREPCENT_TABLE]] Table of Contents Peabody provides disclosure surrounding loss contingencies when it believes that it is at least reasonably possible that a material loss may be incurred or an exposure to loss in excess of amounts already accrued may exist. Adjustments to contingent liabilities are made when additional information becomes available that affects the amount of estimated loss, which information may include changes in facts and circumstances, changes in interpretations of law in the relevant courts, the results of new or updated environmental remediation cost studies and the ongoing consideration of trends in environmental remediation costs. Accrued contingent liabilities exclude claims against third parties and are not discounted. The current portion of these accruals is included in “Accounts payables and accrued expenses” and the long-term portion is included in “Other noncurrent liabilities” in the Company’s consolidated balance sheets. In general, legal fees related to environmental remediation and litigation are charged to expense. The Company includes the interest component of any litigation-related penalties within “Interest expense” in its consolidated statements of operations. See Note 21. “Commitments and Contingencies” to the accompanying consolidated financial statements for further discussion of the Company’s contingent liabilities. Newly Adopted Accounting Standards and Accounting Standards Not Yet Implemented See Note 1. “Summary of Significant Accounting Policies” to the accompanying consolidated financial statements for a discussion of newly adopted accounting standards and accounting standards not yet implemented.